Bad debts expense1/24/2024 ![]() It means, under this method, bad debt expense does not necessarily serve as a direct loss that goes against revenues. The reason why this contra account is important is that it exerts no effect on the income statement accounts. A contra asset account is basically an account with an opposite balance to accounts receivables and is recorded on the balance sheet as such: The reason for the preference is because the method involves a contra asset account that goes against accounts receivables. However, many companies still use the direct write-off for small amounts. When it comes to large material amounts, the allowance method is preferred compared to the direct write-off method. We will demonstrate how to record the journal entries of bad debt using MS Excel. Therefore, the direct write-off method can only be appropriate for small immaterial amounts. Then, in the next accounting period, a lot of their customers could default on their payments (not pay them), thus making the company experience a decline in its net income. For example, in one accounting period, a company can experience large increases in their receivables account. Under the direct write-off method, bad debt expense serves as a direct loss from uncollectibles, which ultimately goes against revenues, lowering your net income. The method involves a direct write-off to the receivables account. ![]() The portion that a company believes is uncollectible is what is called “bad debt expense.” The two methods of recording bad debt are 1) direct write-off method and 2) allowance method. Sometimes, at the end of the fiscal period, when a company goes to prepare its financial statements, it needs to determine what portion of its receivables is collectible. First, let’s determine what the term bad debt means.
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